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Ethical investing: 10 things you need to know

Socially responsible investing is booming as investors challenge the conventional wisdom that returns are not as good as more traditional stocks and mutual funds.

By By Emily Mathieu

Wed., Sept. 1, 2010

Socially responsible investing is booming as investors challenge the conventional wisdom that returns are not as good as more traditional bets on stocks and mutual funds.

Here are ten things you need to know.

1. What does ethical mean?

Ethical investing can mean different things to different people, so step one is identifying your core beliefs. For example, do you believe nuclear power will result in the end of the world as we know it? Or is nuclear a better option than coal? Once you pick your principles, identifying the right companies will come fairly quickly.

2. Understand your goals

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This is an investment, not a charitable donation. Don't confuse the two. Fortunately the idea that using your conscience to guide your wallet guarantees low returns is a myth. The Jantzi Social Index, looks at a basket of 60 Canadian companies selected for their ethical trading practices. It outperforms the conventional benchmark, according to data collected by the Social Investment Organization. Brian Barsness, a vice president with investment management firm Meritas says: “There is definitely enough of a pool that [people] can build a well balanced portfolio and feel confident about it going forward.”

3. How much to invest?

There isn’t a simple answer, because at the end of the day it’s a question of how much risk you want to take. “It really comes down to what the investor wants to do,” says Barsness.

4. Stocks vs. funds

If you have confidence in your own ability to pick stocks go ahead. But if keeping all your eggs in one or two stocks keeps you awake at night, a mutual fund might be a better option. The advantage of funds is that they offer diversification by investing in a bundle of stocks which reduces risk. They have experts who do the picking which, in theory, means better picks..

5. Research your stocks

One reason for choosing stocks is that they are cheaper to buy because you don't pay management fees. But make sure you spend some time researching past performance. If you are jumping into an initial public offering recognize that companies issue shares when it is best for them, but not necessarily for you. Are their assumptions about revenue and profit growth reasonable?

6. Funds offer plenty of options

Ethical investing isn’t just avoiding companies that don’t align with your views. You can invest in a fund that contains companies that actively promote social change or offer a blend of options.

7. Advisors come with advantages

If you use one, make sure part of your conversation delves into whether what they think is ethical matches your view. Advisors who specialize in this type of investing will be able to alert clients to opportunities that might go unnoticed through conventional search channels.

The Social Investment Organization has a member list of financial advisers on their website. The SIO is also the place to get information on events like the Canadian Responsible Investing Conference and web seminars on specific areas. There is also a complete list of SIO member organizations to help would be ethical investors get started.

8. Stayed informed

For information on ethical business practices being used and studied across the country go to the Canadian Business Ethics Research Network. The network’s mandate is to promote knowledge-sharing and partnerships within the field by creating and promoting research hubs across the country.

9. Look for red flags

If your companies are not front page news for more than three months you can set up Google or news alerts to make sure you are kept up to date with their activities around the world

Some research organizations will provide specific information on controversial companies. Sustainalytics has a Controversial Weapons Radar that is covers companies involved in the production, maintenance or trade of anti-personnel mines, biological and chemical weapons, cluster weapons, depleted uranium ammunition and nuclear weapons.

10. Stay on top of things.

This is about making money so keep tabs on the performance of your fund or stock. Any investor should expect regular reporting from their fund or company they are invested in. Make sure you watch for changes in a company or fund’s mandate and adjust your investments as needed.

Emily Mathieu is a Toronto Star business reporter.

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